What Is Tulip Mania?
According to many, the Tulip Mania was the first recorded instance of a financial bubble. The event is believed to have occurred in the 1600s. Let's take a look at the most common narrative that considers the Tulip Mania to be a real financial bubble before discussing whether or not it was a bubble.
The Tulip Mania Bubble
Dutch Golden Age was the time of the Tulip Mania in the Netherlands. In that period, it had the highest per capita income in the world, as a result of its rapid growth in international trade and extensive operations within the trading community.
Economic boom has led to the rise of wealth and prosperity among many people, which has led to the rise of the luxury goods market. It is admitted that tulips are one of the most coveted items in this context, particularly those that have mutations which make them even more beautiful than the standard flowers. Despite their many differences from the other options available, a lot of people were anxious to show off these unique flowers due to their unusual colors and patterns.
An individual flower could easily command a price higher than a skilled worker's, or even a house's monthly mortgage payment depending on the type of flower. By creating futures contracts, the prices of flowers were pushed even higher since the flowers did not have to be physically exchanged. Moreover, the bubonic plague is said to have had a significant impact on the market as people were more inclined to take investing risks during that time.
There were so many farmers growing the flowers, however, that once the supply became too high, the tulip market found its highest point in February of 1637 when there were so many farmers growing the flowers. A sudden lack of buyers led to panic and fear, which spread quickly after a failed tulip auction in Harlem. As a result, the bubble burst within a very short period of time.
In the aftermath of Tulip Mania, historians don't know whether any bankruptcies actually occurred, since records are hard to come by from that period. However, the crash certainly caused significant losses to investors who were holding tulip contracts. However, how does this relate to Bitcoin?
Tulip Mania vs. Bitcoin
A bursting bubble is considered by many to be a prime example of the Tulip Mania. According to the popular narrative of time, there was a period in which greedy or hysterical behavior drove tulip prices beyond any reasonable level. Those who were savvy to get out of the market early were panicking as the free fall began, causing many investors and service providers to lose a lot of money as a result of their panicked selling after the free fall began.
The concept of Bitcoin as being another example of a financial bubble is quite common today. However, connecting the Tulip Mania and Bitcoin does not take into account the fact that they are different assets classes and have different market conditions. Unlike the tulip markets of the 17th century, the financial market in which we currently live is very different and involves many more players than it used to be. Furthermore, the cryptocurrency markets differ significantly from traditional markets.
Main differences
In terms of tulips and Bitcoins, one of the most striking differences lies in the ability of the latter to act as a store of value. Since the tulips had a limited lifespan, it was nearly impossible to tell what variety of flower you would get by just looking at the bulb alone since there was no way to tell what color it would turn out to be. In order to plant it, merchants would have to take a chance that they would receive the type of plant they paid for, especially if they paid for a rare color. However, other than that, they would have to find a way to safely ship the flowers with all the associated costs to their destination if they wanted to move the tulips. In addition to tulips not being suitable for payment, it was impossible to divide them into small sections as this would likely result in the plants dying. Further, flowers could easily be stolen from fields or taken from stalls at markets, which makes them more likely to be stolen.
Bitcoin, on the other hand, is an electronic currency and can be sent over a global peer-to-peer network. A cryptographic technique underpins this digital currency, thereby making it highly resistant to frauds. It is one of the most popular digital currencies today. The Bitcoin can not be manipulated or copied and can easily be split into multiple smaller units. Furthermore, it is relatively rare as the supply is limited to 21 million units, with a maximum supply of only four million units. Although there are some risks associated with cryptocurrencies, following general security principles should help you keep your money safe.
Was Tulip Mania a real bubble?
Earl A. Thompson wrote an article in 2006 titled “The Tulip Mania: Fact or Fiction?”” Throughout his thesis, he talks about how the Tulip Mania wasn't caused by a market frenzy, but rather by the government's implicit conversion of tulip futures contracts into options contracts. Thompson notes that this episode cannot be categorized as a bubble because bubbles entail collectively agreed-upon prices that exceed fundamental values, but that was not the case in this instance.
Anne Goldgar published a book entitled "Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age" in 2007 showing that the Tulipmania story is a myth. Using extensive archival research, Goldgar argues that both the growth of the tulip bubble and its burst were far smaller than we tend to believe. The economic impact was quite minimal, and the number of people involved in the tulip market was rather small.